Under pressure: expectation gaps, liability and counterproductive measures. Jan Garvelink

Transcription

1 Under pressure: expectation gaps, liability and counterproductive measures Jan Garvelink

2 Introduction Public image damaged and under continued pressure Increasing political and regulatory pressure Increasing legal pressure (disciplinary and claims) (but no room for gloom)

3 Developments Pressure brings change: Initiatives from firms and organisations Example: closing the expectation gap EU and national legislation Example: forcing change on the market

4 Expectation gap I (classic version) Auditor: My job is to verify with a reasonable degree of certainty that the accounts drawn up by the company present a fair view. Society: We expect the auditor to do more. He needs to look at company policy and major risks. The NBA and other organisations are taking steps to close this gap.

5 Closing the gap (classic version) Seek to close the gap by crossing it. Two examples: Step taken: extended auditors statement signalling major audit risks. Step contemplated: extending auditors statement to include the director s report.

6 Expectation gap I (reality) sheet I Auditor: My job is to verify with a reasonable degree of certainty that the accounts drawn up by the company present a fair view. Market: The auditor guarantees that the company accounts are spot on and that the company will continue to make a profit.

7 Expectation gap I (reality) sheet II The public: The auditor guarantees the accounts are correct, that the company runs no risk, that the management is competent and that no problems will arise for years to come. The press: See the public above. Add a sauce of scandal. Politicians: We agree with the opinion of the public which we were given through the press even if this is contrary to the laws we made. By the way: we do not listen to the market.

8 Closing the expectation gap (If you misjudge the size of the gap you re in trouble)

9 Closing the expectation gap (reality 2) Are we closing the gap or widening it? Back to the two examples: Step taken: extended auditors statement signalling major audit risks. Perception: extended auditors statement signalling major risks. Step taken: extended auditors statement signalling major audit risks. Perception: extended auditors statement signalling major risks.

10 Managing the expectation gap Some thoughts: keep improving quality of work: explain the function and importance of audit (push back): do not (pretend to) perform work if you cannot meet the expectation it raises with the public.

11 Disciplinary proceedings (1) sheet I In the public domain; part of the court system (since 2009). Mostly professional judges. Number grows. Accessibility is high. Public profile high (and rising). Impact on careers high (and rising).

12 Disciplinary proceedings (1) sheet II Currently under revision. Expect increase of powers disciplinary court. The disciplinary court is quite good at minding the gap, but also quite critical. Currently not keen on holding auditor accountable for issues such as company procedure and signalling of potential risk; this will change with changes in regulation. Thus current steps (the two examples) increase risk.

13 Civil liability (1) Dutch government is not interested in capping liability. Current tone of public debate makes a change in that position very unlikely. Supreme Court (current): duty of care can extend to wide range of parties (policy holders). Little success in limiting this scope. Critical of performance. Lack expertise: reliance on disciplinary Court/expert opinions No free lunch for claimants though; many fail to prove causality or damages.

14 Civil liability (2) The two examples revisited. Extended auditors statement: introduces obligation to warn the public. Audit of directors report: auditor to assume responsibility of directors. Question: is the auditor equipped to perform this kind of work (and what happens to liability risks if not)

15 Tax Loads of publicity about tax evasion. This publicity does not affect tax advisors. Claims on individual level: low profile No real pressure to reform. Duty of care only to client, but high.

16 Expectation gap II (classic version) Expectation: Legislation and publicity will lead to a more open market and opportunities for other (EGIAN) firms. There will be diversification in the market.

17 Expectation gap II (reality) Expectation: Legislation and publicity will lead to a more open market and opportunities for other (EGIAN) firms. There will be diversification in the market. Reality: Greater market concentration.

18 Conclusion Room for gloom?